http://www.businessweek.com/articles/2014-02-13/e-cig-startups-band-together-as-big-tobacco-looms

Companies

E-Cig Startups Band Together as Big Tobacco Looms


The electronic-cigarette business only turned on its little blue lights within the last few years, and already there’s consolidation afoot as big tobacco brands pour money into the burgeoning niche.

Two smaller startups, Victory Electronic Cigarettes and FIN Branding Group, announced a merger, which comes on the heels of Victory’s purchase of Vapestick, a relatively hot e-cig brand in Europe. All told, the merged companies expect to collect more than $100 million in sales this year while saving about $10 million in costs, mostly in production, distribution, and marketing.

FIN, founded in 2011, has a relatively well-known brand and decent distribution in the U.S. Victory, meanwhile, has been in business since 2010 and touts a smooth supply chain and toehold abroad. But here’s the key thing: None of these young companies knows much about the old-fashioned cigarette business. Given that, joining forces may be a savvy way to survive—or at least try to—as established tobacco companies turn their attention to products that don’t require matches.

For a while, it seemed like the e-cig spoils would go to the brand with the best device. But smokeless cigarettes have been patented since 1963, and we’ve yet to see innovation change the game. Increasingly, it looks like all the same forces that drive success for traditional smokes will prevail in the vapor game—namely, manufacturing efficiencies, wide distribution, and marketing, marketing, marketing. These are the things that Big Tobacco excels at.

Not surprisingly, Lorillard (LO), a North Carolina cigarette giant, has quickly become the leader in smokeless devices. It bought the Blu e-cig brand for $135 million in 2012, and in the past six months it garnered $117 million in smokeless sales.

The other major hurdle for e-cig makers is regulation. Among other things under consideration by the U.S. government is a ban on Internet sales, which would be particularly painful for young brands without decades of retail saturation. Complying with new rules—let alone fighting them—is going to require no small amount of legal manpower, which just happens to be another specialty of incumbent tobacco companies.

FIN and Victory stand a better chance of survival as one enterprise, but Big Tobacco is, well, big whether it’s smoldering or steaming.

Kyle-stock-190
Stock is an associate editor for Businessweek.com. Twitter: @kylestock

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